I was recently told a statistic that I thought was shocking. A survey in 2018 found that 76% of business owners regret selling their business a year after the sale. Surprised by this statistic, I went in search of the source of this stat, which turned out to be from the Exit Planning Institute. But it turns out the stat was even more shocking because it wasn’t just ‘regret’ but “profound regret!”
Related articles suggest reasons for this “profound regret” may have more to do with emotional or experiential considerations like
(1) how owners will spend their time post transaction,
(2) how will employees, buyers and others view owners post transaction,
(3) what role will owners have in the Company after sale or
(4) what impact, if any, will owners have on the future or legacy of the Company.
Challenging the Conventional Wisdom of a Business Exit
It’s safe to say the conventional wisdom of a business exit is to sell for the maximum value to a Private Equity fund or corporate buyer. OF COURSE getting the most money = financial security = peace of mind = highest satisfaction. One problem with this strategy is it doesn’t seem to work very well according to those survey results.
Owners Should Consider an Internal Buyout as an Alternative to Selling To a PE Fund or Corporate Buyer
Another less popular or even unconventional approach is to exit via an Internal buyout. The approach of an internal buyout sells the business to others within the Company. These types of buyouts have different names such as non-sponsored buyouts, management buyouts and dividend recaps to name a few. Some internal buyouts can be done with added tax incentives including Employee Stock Option Plan (ESOP), or 338h10 election which is available to S-corps.
While internal buyouts are not as popular or conventional, my experience has been owners who exited via an internal buyout are fairly satisfied with their decision over the long term. A look at some of the common experiences of both approaches may tell us why.
Common Experiences of Both Approaches
- Change In Daily Routine– After a conventional sale (or majority P.E. investment), an owner’s day-to-day routine is often drastically different. Once out of the business, owners may find out they don’t like a heavy dose of golf and travel. They actually miss some of the challenges and experiences of building and running a business. In an internal buyout, owners determine how they want to spend their time. Owners may choose to work in a similar capacity, or gradually phase out or change roles to chairman in order to ensure a smooth transition.
- Leading the Business– In an outright sale, new owners have their own ideas about the future direction of the business and do not consult with the selling owner. A common experience is a selling owner who bids his/her time waiting for the employment contract to end. With a sale to a PE firm, owners may stay involved, or lead future acquisitions. However, the investor decides the strategic direction and key decisions for the Company. Internal buyouts allow owners to still lead or participate as they want in key decisions, important business deals, or special projects.
- Employee Perception – Employees in a conventional sale are typically most worried about their own futures. In an internal buyout the employees gaining ownership usually have a strong appreciation for the owner and the impact the company has on their personal wealth and long-term livelihood.
- Longer Term Succession – Selling owners rarely have any influence on succession plans post transaction. With internal buyouts, owners often craft tailored succession plans that include select family and key managers. Marine Max a $2B public company and the largest boat retailer in the US is currently run by the son of the founder who led a non-sponsored[1] consolidation to launch that business.
Consider an Internal buyout as an Alternative Exit Strategy
Of course, no one way of exiting a business is the ‘right’ way for every business owner. Hopefully the shocking survey results mentioned above help business owners think deeper about different aspects of an exit. Business owners should consider unconventional or “road less traveled” approaches and find greater long term satisfaction.
[1] Company founders “fired” the private equity firm leading them to do an industry consolidation. Meanwhile, the boat dealers organized themselves to combine multiple Sea-Ray boat dealerships and took the combined companies public as a single corporate entity, Marine Max.